Securities Regulators Eying Websites Tied to Crowdfunding

A spike in website names related to crowdfunding suggests an upcoming wave of websites through which small businesses and entrepreneurs could raise investments using
the online strategy.

A spike in website names related to
crowdfunding suggests an upcoming wave of websites through which
small businesses and entrepreneurs could raise investments using
the online strategy, state securities regulators said on
Wednesday.

The website names have soared to 8,800 from fewer than 900
in January, according to the North American Securities
Administrators Association, a Washington-based group of state
securities regulators. They are proliferating as businesses
await rules from the U.S. Securities and Exchange Commission for
structuring crowdfunding deals, the group said.

A future surge of crowdfunding-related websites could also
lead to an increase in online investor fraud, NASAA said.

Crowdfunding is a capital-raising strategy in which
investors buy small stakes in ventures through various websites.
It started as a way to ask many people for small amounts of
money to fund everything from documentaries to community
projects, often in exchange for a free service or product.

Interest in crowdfunding exploded when President Barack
Obama signed the 2012 Jumpstart our Business Startups, or JOBS
Act, in April. The law, aimed at boosting small business
growth, legalized crowdfunding as a way for businesses to
solicit private investors with the promise of potential returns
on their money.

Companies, which will be able to raise up to $1 million
annually using the strategy, must first wait for SEC rules to be
proposed and finalized before soliciting investors. Rules are
expected sometime during 2013. Businesses will be required,
among other things, to conduct offerings through an
SEC-registered intermediary, such as a broker or "funding
portal."

The 8,800 website names found by NASAA all included the word
"crowdfunding." About 2,000 of those are used by websites that
already display content, according to NASAA. The nature of that
content is unclear.

Websites for 3,700 of the names had no content, while more
than 3,000 names appeared to be reserved for later use or sale.
The analysis was conducted by U.S. state and Canadian securities
regulators.

FRAUD ALERT

While many of the sites appear to have been formed by large
credible organizations, "others appear to be created by
individuals that may be operating out of their basements,"
Minnesota Securities Director Robert Moilanen said in a
statement on Wednesday. He also heads an internet fraud
investigations group that NASAA created after the JOBS Act was
signed to monitor crowdfunding and other internet offerings.

"It's kind of alarmist. So what people are reserving domain
names?" said Joe Wallin, a lawyer for Davis Wright Tremaine LLP
in Seattle who represents start-up companies in financing deals.

"Everyone should know the rules aren't final yet and that
you can't do it yet," Wallin said. Companies that are trying to
get around the prohibition would stand out, he said. "But if you
have a bunch of people who are excited about it becoming legal
soon, I don't see why that's bad."

Some companies with active websites may be trying to
circumvent the delay required until the SEC's rules are
finalized, said NASAA President Heath Abshure.

"Some websites are already engaged in some sort of
activity," he told Reuters. A flood of crowdfunding sites after
SEC rules become final could also confuse investors, Abshure
said. "I don't know if legitimate offerers of securities will be
heard over the din of illegitimate offerers," he said.

Many companies and individuals that registered their site
names may abandon their plans when they realize the difficulties
of complying with the SEC's rule, said William Carleton, a
lawyer for McNaul Ebel Nawrot & Helgren PLLC who advises
start-ups about financing.

Regulators, nonetheless, insist on vigilance.

"We do know that fraudulent activities using the internet
occur on a fairly regular basis in other areas," said NASAA's
Moilanen. "The concern is that the internet solicitation of
securities is a new invention. We don't know where this is
going."